Retirement

01/18/2017

It’s not as simple as packing everything you own and heading south. Careful financial and tax planning and a test run will help avoid major hassles if you decide to follow this well-trod path.

Most people live where they do because of either work or family or both. But when retirement is on the near horizon, dreams of moving and starting a new chapter in a new location begin for many Americans. According to a study from Merrill Lynch, people believe that they are free as birds to decide where they live at around age 61.

CNBC’s recent article, “A financial flight plan for snowbirds,” says that it's not surprising to see retirees move, at least part time, to their dream destination. More than a third of retirees surveyed, told Merrill Lynch that they’d already moved, and another 27% anticipated moving soon. But before you begin splitting time between two or more states, think about which state you want to be your primary place of residence, or domicile because you can have multiple residences—but only one domicile.

You should consider the advantages of choosing one state instead of another, like the fact that there are several warm weather states that don’t have a state income tax. Others have tax breaks on retirement income and on real estate taxes for older residents. Estate taxes can also be more favorable in some states than in others.

Once you’ve decided, be prepared to show the government that the state you picked is truly your domicile state. Some states have investigated people who say they’re now residents in other states and who say they don’t owe any taxes.

Each state has its own requirements to prove residency. For example, some basics are heading to the local DMV and changing your driver's license, as well as changing your mailing address and tax return address. A big mistake people make is having their income tax return sent to the wrong state. That can be a bad move, since the federal government and state governments share this type of data.

You should also speak with an experienced estate planning attorney in your new domicile state to be certain that all of your financial and estate-planning documents, like your will, powers of attorney, and healthcare or medical directives, still are legal under the laws of your new state.

Don’t forget to change your auto insurance policies so that you are properly covered in both states.

Our advice? Rent in the new state before you buy. You might find that you miss seeing your grandchildren and children, or that your dream location isn’t exactly what you thought it was. This is a big change at a critical point in your life. If you change your mind, that house that was such a bargain may become a financial disaster, if you want to sell it fast.

01/16/2017

Before the New Year gets old, follow these five steps to get your financial and legal house in order.

It is not flattering but true: people will spend more time planning their vacations than they do their personal finance or retirement planning, according to Business Insider’s article, “A financial adviser shares a 5-step checklist to complete before the end of 2016.” That’s why many professionals advise taking the time to conduct a review of your financial and legal health. This should include assets, liabilities and estate planning documents. You may have had a lot of changes in the prior year, you may have big plans for 2017, or you may have nothing on the horizon, but the habit of an annual review can provide great insight, help your planning and protect your lifestyle.

Here are some important financial steps to take at the start of 2017.

Take financial inventory. Consider aggregating your accounts and identifying what you have, such as IRAs, bank accounts, and life insurance. You should take an inventory of your debt and determine how you will pay it off in 2017.

Review your estate plan. OK, it’s not that exciting, but it’s important. Don’t wait until this time next year because tragedy can strike at any time. If you fail to plan properly, and something unfortunate happens, your family may be left unprepared. It's critical to have control over what will happen to everything that you leave behind.

Update your beneficiary forms. This is a task that should be reviewed periodically—especially if you've been married or divorced, had children, or retired in recent years. A designated beneficiary on an insurance policy or an IRA has precedence over a will or a trust. As a result, it's important to make adjustments after major life changes.

Make some smart tax moves. You should know how the taxes work on your 401(k)s and IRAs, so take a look to be certain you're saving effectively. The maximum annual contribution to a 401(k) is $18,000 or $24,000 if you're over 50. Therefore, if you've got a holiday bonus, that’s the perfect reason to add to your retirement accounts.

You should also remember that you can gift as much as $14,000 per person annually to as many people as you'd like without a gift tax liability. In addition, with any tax planning for retirement, you might think about converting your retirement money through a Roth IRA conversion ladder. Money transferred from a traditional IRA to a Roth is tax- and penalty-free after paying taxes on the conversion.

Evaluate your path to retirement. Retirement planning is important at every stage of life, so be proactive. If you create a plan, it can hold you accountable. It is important to speak with a qualified estate planning attorney. Don’t just “set it and forget it.” Stay on top of issues and continually monitor the situation.

If you are close to retirement, start having conversations with your estate planning attorney, CPA and financial advisor now about tax planning and expected sources of income. That includes guaranteed income, social security, a pension if have one, and how they will work together into your retirement income plan. Your discussions should include your tax situation, and what, if any, aspects of your estate plan need to change for future tax planning.

01/12/2017

For most individuals, the longer the delay, the better, but what if your situation is different?

Choices that you make about Social Security can make a big difference in your retirement income. Most people understand that the longer they wait to take benefits, the higher their monthly payment will be. However, as reported in Kiplinger’s December article, “Social Security: Delay or Hit Go?,” that’s not the right answer for everyone. You’ll be able to make a better decision, if you understand how Social Security rules work and by making an honest assessment of your individual situation.

Social Security 101. First, a short tutorial on Social Security benefits and how they're calculated. What the federal government deems you to be at full retirement age benefit begins between ages 65 and 67, based on when you were born. The amount of money that you receive is based on an inflation-adjusted average of your 35 highest-earning years. You can begin collecting Social Security benefits as early as age 62—but your monthly benefit amount will be permanently locked in at about 30% less than your full benefit amount, which depends on your current age, full retirement age, and income. If you can delay taking your benefits, they’ll grow. If you delay until age 70, your monthly Social Security benefit will be about 135% of your full benefit.

Whether you’re better off waiting to get fewer years of higher income or starting earlier to get more years of lower income really depends on your individual situation. Some of the factors that should be considered include other income sources, your life expectancy, your spouse's benefits, and your risk profile. While there's no one correct answer to the question, there are some ways of thinking about benefits that can help you to find the right answer.

Spousal Benefits. If you're married or were married for more than 10 years and didn’t remarry, you may be eligible for spousal benefits at a maximum of 50% of your partner's full retirement age benefit.

Interest Rates. Each year you delay taking benefits "earns" you an additional 8% in Social Security income down the road, giving you a very attractive rate of return—and Social Security is guaranteed. Social Security benefits are also indexed to inflation, so when you begin receiving your checks the income will keep pace with the rising cost of living. Think about that fact when choosing between starting Social Security and using your investments to supplement retirement income. It is also important to understand that your decision could affect your estate plan, since using your investment assets could result in less money in your estate.

Longevity and Health. People who rely on Social Security to fund their retirement may not have the option to delay taking benefits when they retire. If your health is poor and you don’t expect to live into yours 90s or even 80s, then delaying benefits may not be a priority for you.

Some of these issues are easier to grapple with than others. Generally speaking, consider all of your circumstances, from retirement income to longevity, before making a final decision about Social Security benefits.

01/05/2017

A survey from Siena College and AARP New York points to two generations facing serious retirement challenges as part of a larger change impacting New York City residents.

A telephone survey of 613 African-American residents of New York City between the ages of 36 to 70 are worried about having enough money to retire, as reported in Amsterdam (NY) News’ article, “Survey: Black New Yorkers struggling to save for retirement.” Drawn from a survey conducted by AARP New York and Siena College, “Countdown: New York’s Vanishing Middle Class,” the concern extends to 72% of middle-class Gen Xers whose annual earnings range from $40,000 to $120,000.

The survey found the cost of key necessities like housing, utilities, and food is having a huge financial impact, with 60% saying they’re just getting by, and 47% of middle-class Gen Xers don’t plan to live in New York when they retire.

The survey found that 56% of the city’s African-American Gen Xers hadn’t researched Social Security benefits, and 61% of both generations have failed to research Medicare benefits.

In addition, 74% haven’t written out a retirement plan with a budget, and 62% have no plan for care if they become sick or disabled.

There was a total of about 50% who haven’t even discussed retirement issues with their life partners or families.

Not surprisingly against this backdrop, 63% of all of the survey respondents are frequently worried about having sufficient funds to maintain their standard of living in retirement.

The U.S. Labor Department recently issued a rule that will allow states to enact retirement savings plans for workers. New York’s Governor Cuomo launched a commission to study a lack of retirement savings and to propose solutions. With more than half of all 18 to 64 year old private sector employees lacking a traditional workplace retirement savings plan, the idea of the state creating such a plan is welcome, but may be too late for Baby Boomers.

12/20/2016

Caring for aging parents forces many women to work less or leave the workplace entirely. The impact on women’s careers and economics is expected to grow.

Combine the good news of people living longer and the bad news of the increasing cost of caring for the elderly and you have an economic burden that is having a disproportionate impact on mid-career women, according to “Elder caregiving a growing burden to women in mid-career,” an article in The University of Buffalo’s UBNow news website.

The study found that women caregivers were about 8% less likely to work. After providing care, they were 4% less likely to be working. The study was presented at the Women Working Longer Conference hosted by the National Bureau of Economic Research. The research also found that with caregiving increasing, more current generations of women are more likely to provide care than women previously, since millions of individuals are providing care for their parents or their in-laws.

Data was gleaned from the University of Michigan, which has been monitoring participants for more than two decades. The data used in the study of nearly 9,500 people showed that about 33% of the women had provided care for an elderly parent, parent-in-law, or a spouse. That care can entail assisting a loved one with activities of daily living such as eating, bathing, or dressing. The caregiving for parents, peaks at about 56, and caregiving for a spouse isn’t widespread until the late 60s. In addition, with an aging population, the demand for care is apt to rise. Estimates are that 69% of the elderly will require help with daily activities, and 20% of those people will need assistance for five years or more, with the majority of the help coming from wives and daughters.

With baby boomers retiring, these needs will intersect with the need to retain a productive workforce. The caregiving challenge is growing at a time when more women are in the workforce and are working longer. However, the National Association of Insurance Commissioners reported recently that 10% of caregivers dropped their hours at their jobs due to the demands of caregiving, and about 6% left paid work entirely. In addition, 17% of caregivers take a leave of absence, and 4% decline to take a promotion.

A 2011 AARP study from its Public Policy Institute valued the informal care given by family members in 2009 at more than $450 billion, twice the estimated value of formal care. The long-term economic impact of so many women leaving the workforce and losing income, is expected to have a significant impact on women, their families and the workplace.

11/21/2016

Saving for both retirement and putting kids through college sounds impossible, but with intense planning and commitment, you can make it happen.

A finely-tuned savings plan that begins early in adult life with disciplined savers who do not deviate from the plan can save enough money to send kids to college and save for retirement at the same time. According to a CNBC article, “Saving for college and for retirement isn’t impossible,” it won’t hurt to have generous grandparents but it can be done without them too.

The cost of education is going to be highest for parents with younger children. For a couple today with a newborn, it’ll cost $455,585 to send him or her to a four-year private institution. But the cost of a public institution will be $202,768.

Let’s take a look at a hypothetical married couple. They’re 28 years old with a newborn, and they want to have a second child in a couple of years. The couple has been working since age 22 and earns a total income of $60,000. Their salaries are growing, and they’ve also been adding to their 401(k)s since they've started working and earning an average annual rate of return of 6.5%.

In addition, the couple’s been saving for college since the birth of their first child and they’re earning an annual return of 6%. They can accumulate $6.5 million by age 65 if they start saving 15% of their salaries in their 401(k)s at age 22. That deferral rate includes the couple’s 12% contribution and a 3% company match. When the first child is born, the couple (at age 28) can reduce their retirement plan savings rate to 12.2% and start to invest the difference or about 2.8% of salary into a 529 college savings plan.

After the second child arrives when they’re 30, they will continue saving to their 401(k), but at 9.4%. The difference (5.6% of salary) continues to go toward the college savings plan.

When the first child begins her freshman year of college and the couple turns 46, they can up their retirement plan savings to 12.2% and continue to fund the college plan. After the youngest kid starts college, the parents can go back to their original 15% deferral rate into their retirement plans. They’ll need to keep that level of savings until they retire at age 65. Plus, it’s an even better picture if grandparents help.

A person can make a lump sum contribution of up to $70,000 or $140,000 for married couples filing jointly to a 529 if the gift is spread over five years. Let’s say that grandpa and grandma make a $140,000 gift to the college savings account after the birth of the first child, the couple can continue deferring 15% of their salaries into their retirement plans. So when they hit retirement at age 65, they'll have $7.8 million in their 401(k) accounts.

It’s also important for the grandparents to know that gifting to the grandkids’ 529 lets them take advantage of the estate planning benefit.

Even with this kind of intense savings plan, it is more likely that the couple described above will have enough money for a public school. A private college will still be a stretch, especially for two kids. It may be necessary for a student to take out a loan. Some studies suggest kids having a financial stake in their education may encourage them to take it more seriously.

11/10/2016

A recent international study reported that it will take 170 years before women around the globe reach pay equality with men. This study determined exactly how much income is lost when women step out of the workforce.

If knowledge is power, then the hope is that Business Wire’s article, “Millennial Women Face Significant Gender Gap in Financial Wellness,” will help women gain a better understanding of the cost of taking time out of their careers. The 2016 Gender Gap in Financial Wellness Study was done to clarify the financial impact of leaving the workforce on women’s ability to save for retirement.

There’s already a significant retirement gap between millennial men and women. Although pay parity for the typical 25-year-old may be assumed, there’s still a 28% gap in the additional retirement savings required to cover estimated retirement expenses due in large part to women’s longer life expectancy.

Experts estimate that millennial women will need to save about 12.5% of their pay to meet estimated average expenses when they retire. If you add a career break into the mix, the gender gap in financial security becomes that much more significant. Women need to be aware of these numbers so they can take action to minimize the financial impact of important life decisions.

The study indicates that women who take breaks early in their careers will have a potential retirement savings shortfall of nearly $1.3 million dollars. This gap was identified between women who stay in the workforce for their entire careers versus those who take time off for rearing children, taking on charity projects that pay very little, or caring for aging parents.

In addition, it is millennial women who are at the highest risk of falling short because they face longer career spans. Nonetheless, they’re in the best situation to be proactive and plan for any breaks so the breaks don’t end up crippling their finances.

Forty percent of millennial women who participated in a Wells Fargo survey said that they have not even begun saving for retirement. Most expect to take time out during the course of their careers. Millennials may find that, like baby boomers, retirement comes up far faster than they can imagine.

10/19/2016

We’ve been so inundated with the idea of tax-free investment accounts that the taxable investment account’s role in retirement planning is underutilized and overlooked.

If you’re like most Americans, you’ve got at least one and maybe a few retirement accounts. You like the tax benefits that come from having IRA's, 401k's, 403b's, 457b's and defined benefit plans. You know you’ll have to pay income taxes when you start taking distributions from them, except for the Roth accounts, but seeing those accounts grow makes you feel good. And if you have a Roth, you like knowing that even if you aren’t getting a deduction now, distributions will be tax free. But there are other kinds of investment accounts for retirement planning.

As Physician’s Money Digest says in “10 Reasons You Need a Taxable Investment Account,” taxable retirement accounts are ignored because we’re so focused on IRS-approved retirement accounts. But you might think about supplementing your savings with a taxable retirement account. This can be a regular, old-school investment portfolio that’s not linked to any government regulations and that you’re building for retirement.

Here are some of the benefits of a taxable retirement account:

You have complete freedom over investments;

You’ve got total flexibility over your account;

You can use your portfolio as collateral for a loan;

You don't have to start withdrawing your taxable account when you turn 70 1/2;

You have "basis" in your account, which means when you withdraw money, you pay taxes only on the growth;

You only pay a maximum tax rate of 20% on long-term capital gains and qualified dividends (from stock held for at least one year);

You can write off capital losses in the account;

You can use income from the account to offset an unused investment interest deduction;

Your heirs will enjoy a stepped-up basis if they inherit the account from you; and

Your heirs don't have to start taking withdrawals from the account when they inherit it from you.

But be aware that taxable accounts aren’t protected in the event of a lawsuit, and you get basis instead of a tax deduction. That should be examined in light of your goals and insurance protection.

So while your non-taxable accounts are your first priority when preparing for retirement, take a look at the possible role that taxable accounts may have in your retirement plan. There may be some gaps that a taxable account can fill, and depending on where your finances are, may be a useful tool in tax planning for short and long term goals.

09/01/2016

Having an emergency fund in place will help you deal with the unexpected. Surprising survey results point to this as a very weak link in many Americans’ financial plans.

Seniors who have finally reached retirement age after decades of work and smart planning may think they are all set once their nest egg is funded. But that nest egg needs to be protected by an emergency fund—something which most Americans seem to have forgotten during their retirement planning.

Seniors depend significantly on their retirement funds in retirement—as well as their Social Security and pensions. But rather than keeping a contingency fund of three months of savings, retired seniors should really try to save up even more for the likely event that they need personal or medical care down the road. While it's more difficult to save when you don't have a steady income every month, it is possible and important.

An emergency fund is a good idea at every stage of an adult's life, but why is it even more important in retirement? Once you’re retired, you’re typically living off of savings and fixed income from investments and Social Security—not a salary. And, as individuals age, their typical annual expenses for health care usually go up because the risk of disease or injury can be higher.

Do Baby Boomers need an emergency fund in addition to their retirement savings? While you don’t need to have an emergency fund in a separate bank account than your savings, depending on your own ability to budget, it could be a good idea. The recommended amount of money in an emergency fund is based on a person's current and projected cost of living, but a good rule of thumb is about six to 12 months of average living expenses—and the more the better.

What needs to go into creating and maintaining an emergency fund? Take a look your current insurance coverage—including life and health insurance—as well as your average monthly burn rate (or your total monthly cost of living). Next, list any dependents you’re currently assisting or may need to help in the future—like children, grandchildren or friends. Also consider your current health and any existing conditions, the anticipated increase in health insurance costs and the future costs of estate planning—as well as any senior services that may be required like assisted living, skilled nursing, home healthcare and hospice.

Should an IRA ever be used for emergency expenses during retirement? This presents a problem on many levels. First, it can take time to liquidate IRAs or 401(k)s, and you may not have time in a financial emergency. Second, there may be tax implications, depending on the accounts, your age, etc. Finally, if you are using significant assets for an emergency, you may be putting a big dent in your overall retirement funds.

Protect your nest egg by building up an emergency fund. Just as you saved and planned for retirement, do the same with an emergency fund. When an emergency occurs, and they inevitably do, you will be ready.

08/26/2016

If you enjoy watching the Olympics, try thinking about your own retirement planning efforts in the same way that the athletes in the pentathlon fight to win the gold.

The modern pentathlon, a five event sport, bears a remarkable resemblance to retirement planning today. The five events—fencing, swimming, show jumping and combined running and shooting—and how they relate to retirement planning is detailed in The Des Moines Register’s article, “How the pentathlon reflects retirement planning.”

Fencing. When fencers spar, it’s like investors balancing risk and return in their portfolios. With riskier assets, you get a better return potential. Safer investments help limit your vulnerability in a down market. A sound asset allocation strategy is like the parrying of the contestants…whether to go for broke (literally and figuratively) or balance the attack.

Swimming. The water and the waves in pool lanes create resistance and drag for swimmers. It’s never just smooth as glass when there’s a race on. A person can also experience times of resistance and slowing in his or her portfolio—like during an economic recession or an interest rate hike. The way to get around this is with a diversified portfolio to withstand the waves and to be ready to seize an opportunity when market conditions improve.

Show Jumping. This component of the pentathlon involves jumping over barriers while on horseback, which is no easy task. Obstacles can appear in life beyond market and economic risks that can ruin a well-planned retirement. There are taxes that will be part of your life, and inflation will increase your cost of living over time. Don’t trip over a barrier but rather plan ahead for what might occur.

Foot race. The pentathlon concludes with foot racing and shooting at targets—much like the final stretch that many folks face in the years leading up to retirement. These individuals are trying to save as much as possible. Part of this training requires preparing for potential health care costs in retirement, teaming with an experienced estate planning attorney to create a proper estate plan and including risk management elements in their financial plan.

To be an Olympian takes determination, dedication and practice. Similarly, you’ll be more likely to succeed in this long-term effort if you keep in mind the reasons behind building a retirement nest egg and what matters most to you now and in the future. Blend in some fun along with your hard work so that you can stay committed and reach your goal: an enjoyable and fulfilling retirement.